For many retirees, Social Security serves as the foundation of their income strategy. In fact, the Social Security Administration estimates that nearly 61 million Americans will receive Social Security payments totaling over $918 billion dollars in 2016. Additionally, the AARP Public Policy Institute estimates that nearly half of retirees relied on Social Security for 50 percent or more of their family income, while nearly one in four relied on Social Security for 90 percent or more of their family income. With so many Americans impacted by changes in Social Security, it is important to be aware of the social security changes for 2017.
2017 Cost of living adjustment
While an increase in Social Security payments is undoubtedly one of the most important areas retirees were keeping an eye on for next year, the new inflation increase announced for 2017 will only be 0.3 percent. This represents a paltry $5 increase for the average retiree. Since 2009, there have been 3 years with no cost of living adjustments and the average increase during this period has been a mere 1.1 percent. The cost of living adjustment(COLA) is based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of the last year a COLA was determined to the third quarter of the current year. When there is little to no increase in the index, there is little to no increase in Social Security payments.
The question becomes – is CPI-W an appropriate measure of inflation for all Social Security recipients? With retirees spending a disproportionately large percentage of their income on expenses that tend to increase at higher rates than CPI-W, Social Security increases may not prevent the erosion of purchasing power for many retirees. This continues to highlight the fact that retirees cannot rely solely on Social Security to address inflation and instead should strive to build additional retirement assets.
Increase in Tax Cap
Workers and their employers each pay Social Security taxes (OASDI) of 6.2 percent on earnings up to the applicable taxable maximum each year. This “tax cap” is increasing from $118,500 in 2016 to $127,200 in 2017. An increase in the cap results in an increase in the amount of taxes paid each year for the nearly 12 million workers who are expected to reach the new threshold in 2017. Keep in mind that income above this threshold is still taxed by Medicare (HI) at a rate of 1.45 percent and those with earnings greater than $200,000 (single) or $250,000 (joint filers) will pay an additional 0.9 percent in Medicare taxes.
Earnings exemption increases
It is not uncommon for retirees and pre-retirees to re-invent themselves through second and third careers, often working part-time to supplement other income sources like Social Security. While working part-time before you are ready to fully retire may be financially beneficial, there is a limit on how much someone younger than age 65 can earn while taking Social Security. This limit is increasing from $15,720 in 2016 to $16,920 next year. Taxpayers that will turn 66 next year have a new limit on earnings of $44,880 – an increase of $3,000 for 2017. After reaching normal retirement age (NRA), social security benefits will not be reduced for earning too much. Instead, benefits may simply be taxable.
File & suspend and restricted applications
Due to changes outlined in a previous budget bill, various Social Security claiming strategies are no longer available for retirees. These include the “file and suspend” which was eliminated in May of 2016 and the “restricted application”. While those who turn 62 on or after Jan. 2, 2016 are no longer eligible to file a restricted claim under the new rules, older retirees may still have the option. The perceived loop holes in Social Security have been closed and now a spouse may only receive the larger of their own benefit or their spousal benefit – no more sophisticated switching strategies that allowed for movement between their spousal benefit and their own benefit after they have deferred it. Visit www.ssa.gov or speak to your Social Security office to learn more.
While the loss of these claiming options could lead to less lucrative social security benefits for those that could have taken advantage, it may also represent the beginning of strategies designed to improve the long-term solvency of Social Security. From increasing future “tax caps” on the amount of income subject to social security taxes to adjustments in calculating CPI to reduce future COLAs (chained CPI), taxpayers should continue to be on the lookout for future changes to Social Security and the impacts it may have on their financial plan.
While millions of Americans continue to rely on Social Security each year, questions about the effectiveness of cost of living adjustments and concerns about long-term solvency continue to highlight the need for supplemental income sources in retirement. Since everyone’s situation is unique, consider speaking to your financial and tax advisers to determine the most appropriate tax strategies for you.
Kurt J. Rossi, MBA is a Certified Financial Planner Practitioner & Wealth Advisor. He can be reached for questions at 732-280-7550732-280-7550, kurt.rossi@Independentwm.com, www.Independentwm.com and bringyourfinancestolife.com - LPL Financial Member FINRA/SIPC.